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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Under the purchase method, Tapti Ltd absorbs Godavari Ltd. Godavari Ltd's books show a Development Allowance Reserve of ₹3,00,000, a statutory reserve that must be maintained for the tax benefit. Tapti Ltd decides to preserve this reserve in its books. What is the appropriate accounting treatment under AS 14?

Tapti Ltd should credit the statutory reserve (Development Allowance Reserve) by ₹3,00,000 and debit Amalgamation Adjustment Account by the same amount. This preserves the statutory reserve identity without affecting the purchase consideration, goodwill or capital reserve computation.

  1. ACredit General Reserve by ₹3,00,000 and debit Goodwill
  2. BCredit Capital Reserve by ₹3,00,000 with no debit entry
  3. CCredit Development Allowance Reserve by ₹3,00,000 and debit Amalgamation Adjustment Account by ₹3,00,000Correct
  4. DIgnore the reserve entirely since it is a purchase-method amalgamation

Explanation

Where statutory reserves of the transferor are to be preserved under the purchase method, the transferee records them in its books by crediting the reserve and debiting an Amalgamation Adjustment Account. The debit balance is shown as a separate item and is reversed when the reserve is later reduced or reversed. It does not alter the goodwill or capital reserve figure.

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